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Optimal Fiscal Policy in the Presence of VAT Evasion: The Case of Bulgaria

Author

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  • Aleksandar Vasilev

    () (CERGE-EI, Charles University, Prague
    Department of Economics, American University in Bulgaria (AUBG), Blagoevgrad, Bulgaria)

Abstract

This paper explores the effects of fiscal policy in the presence of a VAT evasion channel, and then compares and contrasts two regimes - the exogenous vs. optimal policy case. To this end, a dynamic general-equilibrium model, calibrated to Bulgarian data (1999-2014), is augmented with a government sector. The main findings from the computational experiments performed in the paper are: (i) The optimal steady-state income tax rate is zero; (ii) The benevolent Ramsey planner provides the optimal amount of the valuable public services, which are now three times lower; (iii) The size of the grey sector is twice lower; (iv) optimal steady-state consumption tax needed to finance the optimal level of government spending is twice lower, as compared to the exogenous policy case.

Suggested Citation

  • Aleksandar Vasilev, 2018. "Optimal Fiscal Policy in the Presence of VAT Evasion: The Case of Bulgaria," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 68(4), pages 399-414, September.
  • Handle: RePEc:fau:fauart:v:68:y:2018:i:4:p:399-414
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    References listed on IDEAS

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    1. Konstantinos Angelopoulos & George Economides & Vanghelis Vassilatos, 2011. "Do institutions matter for economic fluctuations? Weak property rights in a business cycle model for Mexico," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(3), pages 511-531, July.
    2. Chari, V.V. & Kehoe, Patrick J., 1999. "Optimal fiscal and monetary policy," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 26, pages 1671-1745 Elsevier.
    3. repec:bla:jpbect:v:19:y:2017:i:2:p:565-582 is not listed on IDEAS
    4. Aleksandar Vasilev, 2017. "VAT Evasion in Bulgaria: A General-Equilibrium Approach," Review of Economics and Institutions, Università di Perugia, vol. 8(2).
    5. Angelopoulos, Konstantinos & Philippopoulos, Apostolis & Vassilatos, Vanghelis, 2009. "The social cost of rent seeking in Europe," European Journal of Political Economy, Elsevier, vol. 25(3), pages 280-299, September.
    6. Aleksandar Vasilev, 2017. "On the Cost of Opportunistic Behavior in the Public Sector: A General-Equilibrium Approach," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 19(2), pages 565-582, April.
    7. Aleksandar Vasilev, 2013. "On the cost of rent-seeking by government bureaucrats in a Real-Business-Cycle framework," Working Papers 2013_20, Business School - Economics, University of Glasgow.
    8. Judd, Kenneth L., 1985. "Redistributive taxation in a simple perfect foresight model," Journal of Public Economics, Elsevier, vol. 28(1), pages 59-83, October.
    9. Zhu, Xiaodong, 1992. "Optimal fiscal policy in a stochastic growth model," Journal of Economic Theory, Elsevier, vol. 58(2), pages 250-289, December.
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    Citations

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    Cited by:

    1. Vasilev, Aleksandar, 2018. "Optimal fiscal policy with environmental tax and abatement spending in a model with pollution and utility-enhancing environmental quality: the case of Bulgaria," EconStor Preprints 175661, ZBW - German National Library of Economics.
    2. repec:zbw:espost:173175 is not listed on IDEAS
    3. Vasilev, Aleksandar, 2018. "A Real-Business-Cycle model with pollution and environmental taxation: the case of Bulgaria," EconStor Open Access Articles, ZBW - German National Library of Economics.
    4. repec:lus:reveco:v:69:y:2018:i:1:p:1-16:n:3 is not listed on IDEAS
    5. Vasilev, Aleksandar, 2018. "Optimal fiscal policy with utility-enhancing government spending, consumption taxation and a common income tax rate: the case of Bulgaria," EconStor Open Access Articles, ZBW - German National Library of Economics.

    More about this item

    Keywords

    consumption tax; income tax; VAT evasion; general equilibrium; fiscal policy; Bulgaria;

    JEL classification:

    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E26 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Informal Economy; Underground Economy
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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